How Stream Finance’s Collapse Exposed DeFi’s Looping Yield Bubble

Stream Finance, a yield-optimization focused DeFi project that issued a synthetic dollar token called xUSD, told users on Nov. 4 that an “external fund manager” had lost about $93 million in assets tied to the project.

Within a day, xUSD lost over 85% of its value, collapsing from $1.26 to as low as $0.16 by press time. Withdrawals from the platform were frozen, and a dense web of interconnected yield vaults began to unwind, raising questions about how much of DeFi’s apparent growth was built on what are known as circular lending loops.

The disclosure also came shortly after reports surfaced that established DeFi protocol Balancer had been exploited for over $100 million, further shaking confidence in the sector.

As the dust settles, reports continue to surface that indicate the scale of the fallout across DeFi.

What Is Stream Finance?

Stream Finance describes itself as a “tokenized market neutral fund.” The project’s main slogan, “The SuperApp DeFi Deserves,” remains prominently placed on its website at press time, alongside a promise to simplify earning yield on-chain.

But the way Stream worked was largely a black box. Users would deposit supported assets — USDC, ETH, BTC, or EURC — into vaults that promised double-digit APYs. The Stream Finance team would then reallocate those funds into other protocols in various opaque and not fully disclosed strategies in order to deliver the high returns to depositors. Per Stream’s platform, these strategies included “lending arbitrages, to incentive farming, to dynamically hedged HFT, to market making.”

In return for deposited assets, Stream Finance issued corresponding yield-bearing tokens, such as xUSD for USDC deposits, which total over $382 million on the platform at press time, with APY at 18%, per Stream’s official platform.

For comparison, at the time of writing, DeFi’s largest lending protocol, Aave, currently offers 4.8% APY on USDC deposits, while Compound offers just over 3%.

While the value proposition of Stream Finance — much higher yield on stablecoin deposits — was clear, the “yield-optimizing” corner of DeFi is also explicitly high-risk. As the platform itself noted, risks include “Execution failure, smart contract risk, custody risk.”

To provide the higher-than-usual yield, players like Stream build on-chain positions that include self-looped lending markets, risk curators, and automated strategies— all without disclosure to users lending or depositing their assets — which makes understanding the full scope of risk complex, if not impossible.

How Things Started: Recursive Minting

Even before Stream revealed its losses and xUSD collapsed, some in the crypto community had already noticed something was off. After crypto’s biggest liquidation event ever on Oct. 10, which wiped out around $20 billion from the market, Stream Finance and a few others were suspiciously acting as if nothing had happened.

That raised eyebrows among on-chain analysts who began increasingly flagging a pattern where Stream Finance was lending and borrowing its own assets, recycling borrowed tokens into partner vaults, and minting new yield tokens on top, effectively creating circular liquidity and inflating total value locked.

And for some time, that tactic worked, as looped liquidity pushed Stream Finance’s self-reported total value locked (TVL) above $200 million. However, many now question this tactic, saying tracking sites likely double-counted bridged tokens, artificially inflating TVL.

As warning signs popped up, DefiLlama updated its metrics, wiping millions off Stream Finance’s TVL page. After news broke of Stream’s collapse, DefiLlama’s pseudonymous founder, 0xngmi, posted on X that they might start asking protocols with funds on centralized exchanges to share data, because “currently all protocols with funds on CEXs are a black box in terms of verification.”

DeFi yield aggregator Yearn’s lead, known on X as Schlag, posted yesterday evening that “none of what happened came out of nowhere,” adding that “as with any good bubble/blow up, it has been slowly brewing and was simply a matter of time till it burst.” Schlag also added that Stream Finance is “far from the only ones out there with bodies to hide.”

On Oct. 28, just a few days before Stream reported its $93 million hole, Schlag had sounded the alarm on X in a detailed article, reporting that Stream Finance and Elixir, a DeFi protocol focused on liquidity provisioning, were using hidden markets on lending protocol Morpho.

Per Schlag’s report, Elixir was supplying USDC via Morpho’s private vault, in which Stream Finance was the only borrower, using its own xUSD as collateral. “It is hard to know for sure how much actual collateral is backing this full system, but it seems likely to be sub $0.10 per $1,” Schlag concluded at the time.

Schlag also explained how Stream and Elixir executed a so-called looping mechanism, “recursively minting each other’s tokens in order to inflate their own TVL and create a ponzu the likes of which we haven’t seen for awhile in crypto.” As Yearn’s lead explained, Stream Finance’s xUSD wallet received millions in USDC, cycled the funds through multiple addresses, swapped into USDT, minted Elixir’s own synthetic dollar token, deUSD, and then used the borrowed assets to mint more xUSD.

“[…] using the same $1.9m USDC they minted about 14.5m xUSD […],” Schlag wrote.

On Nov. 3, Elixir responded to concerns about xUSD that were increasingly circulating on social media, saying that it had “full redemption rights at $1 with Stream” and claimed to be “the only creditor with these 1-1 rights.”

The Fallout

The breaking point came that same day, on Nov. 3, when Balancer V2, one of the biggest automated market makers, was hacked for $128 million. The exploit sparked confusion about potential contagion, and liquidity providers rushed to exit any pools that looked connected, triggering a classic bank run on Stream Finance, as users rushed to withdraw their funds.

On Nov. 4, Stream unveiled the $93 million loss, but offered few details, except that it had hired U.S. law firm Perkins Coie LLP to investigate the incident. The project then notified users that it had suspended both withdrawals and deposits.

By then, xUSD’s value had already crashed far below $1, and the web of vault integrations began to break down. When the collapse finally hit, the scope of those hidden loops became at least somewhat visible.

Several major DeFi protocols, including Morpho, Euler, Silo, and Gearbox, were found to have accepted Stream Finance’s xUSD as collateral, despite evidently being aware of the asset’s recursive minting structure. This interconnected setup allowed xUSD-backed positions to spread across multiple lending markets, amplifying risk throughout the ecosystem.

As the scheme unraveled, reports surfaced that risk curators and vault managers such as Beefy, Silo, and Valarmore had reallocated user funds into xUSD without transparent disclosure, leaving depositors unknowingly exposed to Stream’s token.

“Too many entities, no oversight,” JohnnyTime, founder of web3 security firm Ginger Security, wrote in an X thread on Nov. 4.

Speaking with The Defiant, Driss Benamour, co-founder and CEO of YO Labs, the firm behind multi-chain yield optimizer YO, called the strategy behind xUSD a “degen practice in DeFi,” clarifying that “YO vaults had no exposure to xUSD and no meaningful exposure to yUSD.”

Silo Labs, the firm behind the Silo protocol, said in a press release shared with The Defiant on Nov. 5 that the Silo DAO is also preparing to take legal action, but against the Stream team, as the incident “has left lenders unable to access funds or redeem xUSD and xBTC.”

In the release, Silo Labs said that Silo DAO will work closely with its legal counsel to prepare and coordinate the case to seek “maximum possible repayment, distributed pro rata to all affected lenders.”

Stream’s Response

Before Stream Finance revealed the major losses, the platform’s founder, known by the pseudonym 0xlaw, tried to reassure users, saying in a now-deleted Oct. 29 post on X that Stream maintains a more than “$10 million insurance fund,” and that all positions outside the main wallet are “fully liquid immediately.” The founder also promised a transparency report on Stream’s strategies.

Although 0xlaw initially agreed to an interview with The Defiant on Oct. 28, they didn’t respond to follow-up questions about the transparency report or the details of the announced insurance fund.

After the meltdown, Stream Finance’s founder wrote in an X post that has since been made private that they’re “not the external fund manager” responsible for the multi-million loss, claiming that “zero strategies i was running suffered any drawdowns. we are pursuing aggressive legal against the asset manager responsible. i had zero knowledge of this due to various reasons until briefly before it was made public.”

But with roughly $285 million in debts intertwined across risk curators, vaults, as well as lending markets, and multiple yield tokens collapsing 30%-99% as of Nov. 5, the fallout has exposed just how fragile DeFi’s stacked-yield economy had become and how badly its so-called risk curators failed.